Archives for March 2015

Federal TRO Practice – The Legitimate Interest, Near-Permanence and Balance of Harms Test: Cumulus v. Olson – Part II of III

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Cumulus Radio v. Olson, 2015 WL 643345 also discusses the legitimate business interest test, what constitutes an adequate remedy at law and the balance of harm elements of injunctive relief under Illinois law.

To determine whether a given restrictive covenant is reasonable, the court examines whether (1) the plaintiff has shown a legitimate business interest, (2) the restrictive covenant imposes an undue hardship on the employee; (3) the restriction injures the public, and (4) the time (how long?) and territory (how far?) limits of the restriction.  Illinois courts recognize that radio stations have a valid business interest in its customers given the highly competitive nature of broadcasting.  *7.

In assessing prong (1) – a legitimate business interest – the court considers whether a business has a “near permanent” relationship with its customers and advertisers who fund the broadcast by buying radio ads.  

The near-permanence inquiry distills to seven factors: (1) permanence of the relationship, (2) the amount of money invested to acquire clients, (3) the degree of difficulty in acquiring clients, (4) the extent of personal customer contacts by the employee, (5) the extent of the employer’s knowledge of its clients, (6) the duration of the customer’s activities with the employer; and (7) the intent to retain the employer-customer relationship.

The court examined these factors and found that the plaintiff radio station showed a near permanent relationship with its customers.  Illinois law recognizes that radio stations have a protectable interest in the near permanence of their customers as the plaintiff offered evidence that showed how time-consuming, expensive and arduous it is to cultivate clients.  

The plaintiff’s testimony that the radio industry is largely relationship-driven and that many of plaintiff’s clients were long-time customers also swayed the court.

The plaintiff also showed an inadequate remedy at law; meaning, money damages wouldn’t fix the defendant’s mon-compete breach.  Where a plaintiff can pinpoint specific lost accounts, money damages are the proper remedy; or “adequate.”  Here, though, plaintiff had difficulty identifying which contracts the plaintiff lost to the competing station.  This made it impossible to quantify plaintiff’s damages.

The closest call was the balance of harm element – the harm resulting from the injunction weighed against its benefit.  The harm here to the defendants was palpable and severe.  The sales executive was enjoined from working for the competing station in his chosen profession for a period of six months (from the entry of the injunction) and within a 60 mile radius.  He was also forbidden from soliciting any of plaintiff’s customers with whom he had contact for a 12 month period.  

The radio station defendant suffered harm, too.  It lost the benefit of a $250K/year salesman’s services for the duration of the non-compete term.

But the court found the benefit to the plaintiff outweighed the harm to the individual defendant.  It noted that if it denied plaintiff’s injunction request, the employment contract signed by the defendant would be meaningless and the plaintiff would face the prospect of untold lost clients due to the defendant’s clear breach of the non-compete provision.

Takeaways:

– The more time, effort and money a plaintiff can show goes into developing clients, the better his chances of showing near permanence and getting injunctive relief;

– money damages won’t properly compensate a plaintiff who can’t specify lost accounts flowing from a non-compete violation;

upholding the clear language of a contract can trump an employee’s right to earn a living if the violation is blatant and the restrictions are reasonable. 

 

“Will It Play in Peoria?!”: Fed. Court Casts Doubt on Continued Vitality of ‘Two – Year Rule’ to Enforce Non-Compete

Peoria

Fifield v. Premier 2013 IL App (1st) 120327 is (was?) an important case in employment law circles for cementing the “two year rule”: two years of continuous employment is the bare minimum length of at-will employment required for an employer to enforce a restrictive covenant.

From the employer’s vantage point, the rule was troubling since it gave the employee all the leverage: he could leave a job at any time before he reached the two-year mark regardless of whether he signed a non-compete.

About two years later, Prairie Rheumatology Assocs. v. Francis, 2014 IL App (3d) 140338 followed Fifield but with a twist: it considered whether an employer could elude the two-year rule if by offering am employee an additional benefit (e.g., training, marketing support, bonus payments, etc.) beyond continued employment.  Still, the court in that case nullified the non-compete since the doctor defendant decamped less than two years  of her hire date.

Enter Cumulus Radio Corporation v. Olson, 2015 WL 643345 (C.D.Ill. 2015), a Federal case that examines whether the two-year rule is inexorable in the context of a radio station’s injunction suit against a competitor in the Peoria, Illinois market.

The plaintiff sued its former account executive and his new employer, a competing station, for violating restrictive covenants contained in an employment contract signed by the executive.  The contract contained a six-month/sixty mile non-compete term and a 12 month non-solicitation and non-disclosure term.  The non-solicitation clause barred the executive from contacting certain of plaintiff’s customers (radio advertisers) for 12 months after he leaves.

The plaintiff resigned 21 months into his tenure with plaintiff and began working for the competitor just two days later.  The plaintiff sought a temporary restraining order (TRO) preventing the executive from working for the competitor for the duration of the non-compete term.  The Southern District granted in part and denied in part the plaintiff’s TRO request.

Under Federal Rule of Civil Procedure 65, a TRO plaintiff must show that (1) he will suffer immediate, irreparable injury; (2) a likelihood of success on the merits; and (3) lack of an adequate remedy at law.  If the plaintiff makes the required showing on elements (1)-(3), the court then balances the relative harms to the parties and the public if the TRO is granted.  *2.

On the breach of contract count – alleging the executive breached all the restrictive covenants – the court found that the executive’s 21-month tenure with the plaintiff was sufficient consideration to support the non-compete.

The court refused to rigidly apply Fifield and “predicted” that Illinois’ Supreme Court would apply a more flexible test than the dogmatic two year rule.

For support, the court pointed to two  recent Northern District decisions that rejected the two-year rule in favor of a more fact-specific and flexible test.  The reason, according to the court, was that if the two-year test is formulaically applied, restrictive covenants would be rendered illusory and voided at the “whim of the employee.” (**4-5).

In finding that employing the executive’s for a 21-month term was adequate consideration to support the restrictive covenants, the court found that the plaintiff showed a likelihood of success on the merits on its TRO claim that the executive breached the employment contract.

Takeaways

Significant in that it’s another Federal court casting doubt on the continued vitality of the two-year rule.  Practitioners who are seeking to enforce restrictive covenants where the underlying employment length didn’t reach two years, now have three District court cases – two from the Northern, one from the Southern – that show a willingness to depart from the two-year rule.

 

 

Guest Post: Do Attorney Liens Attach to ESI Hosted by E-Discovery Vendors

This is a guest post from Chad Main of Percipient, an e-discovery and legal technology company focused on managed document review.

A recent opinion from the Illinois First District of Court of Appeal, Cronin & Company, LTD. v. Richie Capital Management, LLC, 2014 IL App. 131892-U (unreported), raises interesting questions about attorney liens, client files, e-discovery and the Rules of Professional Conduct. In Cronin, the court held that an attorney’s retaining lien (a lien used to secure payment of unpaid legal fees), attached to electronically stored information (ESI) hosted by an e-discovery vendor in Relativity, an e-discovery software platform. The court noted that although retaining liens attach only to documents actually possessed by the attorney asserting the lien, it encompassed ESI hosted by the vendor because the vendor acted at the direction of the attorney and therefore, the vendor’s possession of the electronic data was imputed to the attorney. As discussed below, in states that permit them, retaining liens are a helpful tool for attorneys to secure outstanding fees, but attorneys must also be mindful of the tension between the right to recover fees and the Rules of Professional Conduct.

Types of Attorneys Liens Available to Recover Fees

In Illinois, attorneys may assert two types of liens against former clients to ensure payment of outstanding fees. The first is a charging or, special lien governed by the Illinois Attorney’s Lien Act, 770 ILCS 5/1, which attaches to the recovery in the case for which the attorney is retained. The second type of lien, and the kind asserted in Cronin, is a retaining lien. A retaining lien enables an attorney to retain a client’s files, money and property possessed by the attorney until outstanding fees are paid. Upgrade Corp. v. Michigan Carton, Co., 87 Ill. App. 3d 662 (1st Dist. 1980).

Retaining liens are generally passive liens and enforceable only to defend against an action by the client seeking return of the property. Retaining liens continue until: 1) payment of outstanding legal fees; 2) the client posts adequate security for payment of unpaid fees; or 3) the attorney surrenders possession of the withheld property. Twin Sewer & Water, Inc. v. Midwest Bank & Trust, Co., 308 Ill. App. 3d 662, 644 (1st Dist. 1999). However, an attorney’s right to a retaining lien is not absolute and courts may order the release of client property if equity or fairness warrants. Upgrade, 87 Ill. App. 3d at 664.

Tension Between Attorney Liens and The Rules of Professional Conduct

Although attorneys may be permitted to assert liens over client property, they must be aware of ethical obligations relating to client files. As noted by Seventh Circuit in Johnson v. Cherry, 422 F.3d 540, 555 (7th Cir. 2005):

As a general matter, a lawyer’s ethical duties to her client do not preclude an attorney from invoking her retaining lien in furtherance of her right to compensation. See Ill. Rule of Professional Conduct 1.8(i)(1); see also American Bar Association’s Model Rules of Professional Conduct 1.8(i)(1), 1.16(d) (2000). This is not to say that retaining liens are beyond criticism. See John Leubsdorf, Against Lawyer Retaining Liens, 72 Fordham L.Rev. 849 (2004) (urging abolition of retaining lien). But the lien has been recognized and enforced in Illinois for more than 100 years. See Sanders v. Seelye, 128 Ill. 631, 21 N.E. 601, 603 (1889).

One of the main tensions between attorney liens and the Rules of Professional Conduct is found in Rule 1.16 which governs the termination of client relationships. Jim Doppke, former senior litigation counsel for the Illinois Attorney Registration and Disciplinary Commission, and now with Chicago’s Robinson Law Group cautions that “Rule 1.16 requires attorneys to take all steps ‘reasonably practicable’ to protect a client’s interest” and in some circumstances holding back client files, such as e-discovery materials, could prejudice a client.

So, what should an attorney do who wants to assert a retaining lien against the client’s file? Doppke says the first step should be negotiation of the outstanding fees and to make sure negotiations are in writing. “[Attorneys] definitely want to communicate ‘on the record’ with the client or new counsel because if the dispute is brought to the attention of the ARDC, often one of the allegations against the attorney is inadequate communication with the client.” Doppke says that attorneys should “surrender all paper and files to which the client is entitled,” but notes that lawyers may retain any documents as permitted by law. However, Doppke notes that “what the client is entitled to” is admittedly vague and absent a court order, is often determined by subjective factors.

Attorneys may not be completely without guidance. The federal court for the Northern District of Illinois addressed the issue of attorney liens and a client’s right to property in Lucky-Goldstar Intl. (America), Inc. v. International Mfg. Sales Co., Inc., 636 F. Supp. 1059 (N.D. Ill. 1986). What a client is entitled to, observed the court, “begs the question. If the attorney is properly asserting the retaining lien, the client is not entitled to the property” and therefore, rules of attorney discipline are inapplicable. However, the court acknowledged the tension between an attorney’s right to assert retaining liens and a client’s right to property, but noted that neither was absolute. A court faced with a dispute over an attorney’s retaining lien “should be to provide access to the documents necessary without prejudicing the rights of either party to a controversy [over attorneys fees].” The court counseled attorneys to consider:

  • the client’s financial situation;
  • the sophistication of the client in dealing with lawyers;
  • the reasonableness of the fee;
  • whether the client clearly understood and agreed to pay;
  • whether imposition of the retaining lien would prejudice the important rights or interests of the client or others;
  • whether failure to impose the lien would result in fraud or gross imposition by the client, and
  • whether there are less stringent means to resolve the dispute.

Bottom line, Doppke says, is that the attorney must “keep an eye on the ball of what the client needs to go forward with the case” and not withhold those documents. This could be especially true in matters with significant e-discovery because a bulk of the case material could be electronic documents. As noted, one solution is requiring the client to post security for the unpaid fees as suggested by the court in Upgrade. This protects both the client’s ability to prosecute or defend a case and the attorney’s interest in unpaid fees.